Core sector may get huge capital subsidy

$5 bn forex reserves may be used next year.

The government is considering providing capital subsidy to infrastructure projects, using $5 billion of its foreign exchange reserves. The subsidy will be for importing capital goods for the infrastructure sector next year.

With sectors like roads, railways, civil aviation, power and irrigation in dire need of funds, there is no dearth of viable projects in the economy, said sources in the Planning Commission, which along with the finance ministry and the Reserve Bank of India (RBI), is working on a mechanism to utilise these funds in a non-inflationary manner.

"A mechanism should be in place by November. It would be a simple route. The funds will be utilised to fund projects in infrastructure sectors. There is no dearth of viable projects in the economy," Planning Commission Deputy Chairman Montek Singh Ahluwalia told Business Standard.

The move is likely to increase fiscal deficit, but there could be a consensus on the level to which the deficit could be allowed to rise, he said, adding that care would be taken to ensure that the move is non-inflationary. If the money is used to import capital goods, there would be no impact on inflation, Ahluwalia said.

The government is likely to issue bonds to the RBI against the forex reserves and use the money to subsidise import of capital goods required for the infrastructure sector. For most projects in infrastructure, only about 15 per cent of project costs are on account of imports.

The country had accumulated reserves of over $120 billion on July 9 which fell to $117.58 million on September 3, mainly due to RBI intervention to strengthen the rupee, the rising trade deficit and the hike in international interest rates.

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How the subsidy helps

• Viability gap funding will make projects bankable and attract private participants
• NHAI's 40% of cost capital subsidy for BOT projects not adequate. Only Rs 8,000 crore of the Rs 30,000 crore Golden Quad is privately funded

But it is not enough

• Banking sector requires assured returns
• Govt could pick up minority stake in infrastructure projects. Private players can leverage it to raise debt